Performance at Purdue

January 11, 2013

A large archway stands over the entrance to Stadium Mall on the campus of Purdue University in West Lafayette, Indiana, U.S., on Oct. 22, 2012. (Daniel Acker)

If you've spent time in the private sector, you know how it compensates workers. Pay may never be calibrated to everyone's liking, but it tends to reflect an organization's performance: Weak performance? Weak pay.

A few industries, though, have avoided this menacing linkage. None has been a greater refusenik than the higher education industry. There the coin of the realm isn't performance, but rather comparison: If chancellors or administrators or professors at similar institutions earn X, then people at our fine college should earn at least X+1. So imagine the kerfuffle in the higher ed industry over the heresy being preached at Purdue University:

Monday morning, Mitch Daniels will relinquish the governorship of Indiana and, that afternoon, will travel to West Lafayette to become Purdue's 12th president. His base salary will be generous but lower than those of most of his peers. More radical is the fact that Daniels' total pay will be based on whether he does, or doesn't, achieve annual benchmarks. Yes, a major university's president will be judged by such factors as: making Purdue more affordable for students, raising graduation rates, diminishing student indebtedness, burnishing the school's academic excellence and, yes, fundraising.

Academia long has resisted tying compensation to performance metrics: Institutions, not market forces, have determined the cost of their operations and, in turn, the retail prices they charge. Their docile customers complain and wheedle for discounts (aka financial aid), but usually surrender tuition payments on time lest Muffy or Biff be dropped from next semester's classes.

That lack of consumer push-back has had a rational underpinning: Everyone in the equation has understood that the lifetime value of a college degree greatly exceeds the required dollar investment. That has been true even at — especially at? — the priciest schools.

But after years of U.S. household income slippage, and an equally slippery job market for college graduates, the families, taxpayers and donors who together fund most of U.S. higher ed now expect more sophisticated thinking from the mortarboard crowd in Old Main. Two new reports reflect the forces buffeting the higher ed industry:

• On Wednesday, the Pew Charitable Trusts reported that during and after the Great Recession, young people without degrees suffered larger drops in employment and income than did those who had completed college. To our eyes, though, the overarching finding was that employment rates for all clusters of Americans ages 21 to 24 — regardless of education — have fallen.

Seen through that cold prism, the desire of families to get the most out of their college dollars makes eminent sense. Few households today can afford to lavish the money and time that, in the 1978 film "Animal House," allowed John Belushi as the expelled Bluto Blutarsky to wistfully mutter, "Seven years of college down the drain."

• On Thursday, Moody's Investors Service said that tuition likely will decline this fiscal year at 15 percent of public universities: "While a majority of universities continue to project net tuition revenue growth, a growing share is not able to keep pace with inflation," Moody's wrote. "This growing revenue challenge is forcing college leaders to pursue more aggressive cost cutting measures and introduce innovative revenue strategies."

Moody's summed up the phenomenon as "weaker pricing power for colleges."

By the laws of economics, that translates into greater pressure on higher ed to economize — as so many other industries have had to do.

In Daniels, Purdue has a proven economizer. He'll surely examine why the university has been adding administrators at a much faster clip than it has added instructors. Although here, as in other institutions with $2.2 billion annual budgets, complexities will abound: Many of the admin hires have succeeded at their missions: bringing many more contributions and research grants to West Lafayette.

We expect Daniels to run Purdue the way that, for two terms, he has managed Indiana state government: focusing less on the knee-jerk question of how many dollars are spent than on the value-adding question of how well they're spent. But by requesting a contract heavily reliant on his measurable performance — that is, by proposing that he be judged on results — he has set himself apart from other university leaders.

Granted, Daniels' base salary of $420,000 is nearly four times what he has earned as governor. If he meets every performance goal, his pay would rise by 30 percent, to $546,000. Even at that rate, Daniels would rank 10th among the 12 Big Ten presidents. His predecessor at Purdue, France A. Cordova, was paid $555,000 in fiscal 2011.